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Market economies are based on the laws of supply and demand. Left unfettered by government intervention and regulation, a product market will theoretically find an equilibrium price free of shortages or surpluses. This means that companies will produce enough of a product, _and only enough, t_o meet consumers’ needs.

Pro: Competition Drives Down Prices

The market system is based on the principle that each participant acts in her best interest. Manufacturers seek the highest profit to maximize their interests. Consumers promote their interests by looking for the lowest prices and best quality. Out of these conflicting objectives a market price emerges as if, in the words of Adam Smith, guided by an "invisible hand." In other words, no one market entity sets prices or determines what quantities are produced.

This forces companies to produce exactly the goods that customers want, and at the price customers want to pay, if they are to sell more products than their competitors. For consumers, this usually translates to lower prices and a wide variety of choice.

Pro: Minimizes Waste

Market economies are based on the concept that people are free to make their own choices about what services or products to purchase. In theory, market economies are efficient because a capitalist market system aims to produce goods with a minimum of wasted resources. Rational people do not throw away resources or money, so producers work to maximize their profits by minimizing waste. Consumers likewise will spend their incomes in ways that maximize satisfaction.

Con: Disregard of the Greater Good

The downside of a market economy is that costs associated with production are not always paid by the supplier. If pollution is a byproduct of manufacturing, for example, it may not be factored into the price that a consumer pays for the product. Similarly, since a company is driven to maximize its profit, it may not be too concerned about the health and safety of its workers. These external elements are passed on to others who are not party to the production or sale of commodities.

Con: Outcomes are Inequitable

Market outcomes may not be equitable. A rock star earns substantially more than a teacher because fans are willing to pay lots of money for concert tickets and recordings. Nevertheless, this outcome reflects the value that a market economy places on different services. A market economy will produce what people want, not necessarily what they need. In theory a market economy adapts to changing conditions; in practice, however, entrenched industries may resist change.

Pro or Con: Compromises Are Often Necessary

Some products and services a market economy cannot handle or does not handle well. In such cases, the market economy must be augmented by government services or regulation. National defense, for example, is a responsibility of government. So is the regulation of utilities and other industries where safety and quality are concerns, including pharmaceuticals, food production and the energy sector.

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About the Author

Thomas Metcalf has worked as an economist, stockbroker and technology salesman. A writer since 1997, he has written a monthly column for "Life Association News," authored several books and contributed to national publications such as the History Channel's "HISTORY Magazine." Metcalf holds a master's degree in economics from Tufts University.